Municipal bond volume should hold steady this week, buttressed by a $1.8 billion Illinois deal that has the industry’s attention.
Market calculations predict municipal bonds sold this week to total $6.09 billion, a tick or two down from the revised $6.11 billion last week. The lion’s share should be negotiated deals, as the competitive side of the ledger boasts no issues larger than $80 million.
The muni market is hitting a telling stretch in the year. Supply remains relatively subdued — though for now not as meager as in 2011 — nominal yields are extremely low, demand is particularly strong, and a lot of interest income and redemptions are due to arrive.
The market also appears to have absorbed the new issuance without too much difficulty. If Treasury yields remain relatively steady, the technicals of the tax-exempt market could well lead to noticeable muni outperformance heading into the summer, said Ron Schwartz, portfolio manager of the RidgeWorth Investment Grade Tax Exempt Bond Fund.
“Even if Treasuries remain stable at this point in time, we think the supply-demand imbalance could make muni bonds relatively outperform, and that’s because you’ll have a lot of people with their cash to invest in the municipal market,” he said. “And when they look at new deals, there’s a limited supply to pick from, so we think ratios could get a little more expensive this summer.”
Digging into the week’s volume numbers, $719.3 million in competitive offerings are scheduled for sale this week, compared with a revised $1.91 billion last week.
There is also $5.37 billion in negotiated deals slated for sale this week, against a revised $4.19 billion last week.
Illinois boasts the largest deal for the week. Jefferies & Co. is expected to price $1.8 billion of the state’s general obligation refunding bonds.
The debt is rated A2 by Moody’s Investors Service, A-plus by Standard & Poor’s and A by Fitch Ratings.
The deal is expected to arrive Tuesday, structured as serials maturing from 2013 through 2026.
The size of the deal alone is compelling, according to Tom Dalpiaz, a senior vice president and portfolio manager at Advisors Asset Management.
But Illinois also has persistent credit-quality challenges concerning its budget and pensions.
“On such a big issue, with some very visible credit-quality problems, let’s see what levels this comes in at,” he said. “Let’s see what it takes to clear this market.”
If the strong demand for munis persists and the deal goes reasonably well, it’s a pretty good indicator for the market’s health, Dalpiaz said.
That’s because many buyers are looking for yield and are encouraged by what they see in the market.
What’s more, Schwartz added, Illinois GOs have been trading slightly cheap on a relative basis before this deal, so the market is interested to see how so large an offering will be priced.
“We’d think they would have to be priced somewhat attractive to get investors to buy this amount of bonds,” he said. “The other aspect that’ll be interesting will be to see if we get crossover buyers to participate on this deal; the absolute yields might be tempting to them.”
Citi should price $515 million of Louisiana gasoline and fuels tax revenue refunding bonds.
The bonds are rated Aa1 by Moody’s and AA-minus by Standard & Poor’s and Fitch. They are expected to arrive Wednesday, structured as serials.
Barclays Capital is expected to price $329 million of District of Columbia income tax-secured revenue refunding bonds. The debt is rated Aa1 by Moody’s, AAA by Standard & Poor’s and AA-plus by Fitch.
A retail order period for the bonds is expected to be held Wednesday. Institutions should have their opportunity a day later. They are scheduled to be structured as serials, maturing from 2012 through 2026.
JPMorgan is expected to price $300 million of wastewater system revenue refunding bonds and subordinate revenue refunding bonds.
The senior-lien bonds are rated Aa2 by Moody’s and AA-plus by Standard & Poor’s and Fitch. The subordinate bonds are rated Aa3 by Moody’s and AA by S&P and Fitch.
Bank of America Merrill Lynch should price $200 million of Ohio Higher Educational Facility Commission hospital revenue bonds for the University Hospitals Health System.
The bonds are rated A2 by Moody’s and A by Standard & Poor’s.
A retail order period is scheduled for Tuesday and institutional investors may participate on Wednesday. They should arrive structured as serials and terms.